PAUL G. HYMAN JR., Chief Judge.
The Court held an initial hearing on the Motion on March 8, 2011, and an additional hearing on June 21, 2011 to clarify several material facts. At both hearings, the Debtor offered evidence and proffered facts without objection. Additionally, the Debtor and OneWest each submitted written proposed orders (D.E. 152 and 153, respectively), as well as a Joint Stipulation of Facts (the "Joint Stipulation") (D.E. 149). The Court, having considered the Debtor's exhibits and proffers, the written proposed orders, and the Joint Stipulation, hereby makes the following findings of fact and conclusions of law.
The Debtor filed a petition for relief under Chapter 11 of the Bankruptcy Code on August 12, 2010 (the "Petition Date"). The Debtor is a condominium association, a Florida not-for-profit corporation created in connection with the formation of the Spa at Sunset Isles Condominium (the "Condominium"), as reflected by the Condominium's Declaration of Condominium (the "Declaration").
Florida law and the Declaration govern the relationship between the Debtor, the Common Elements, and individual Units. Appurtenant to each Unit is an undivided interest in the Common Elements, apart from which a Unit cannot be conveyed or encumbered separately. The Debtor is required to maintain the Common Elements, and is the only person or entity permitted to do so under the Declaration and applicable Florida law. Virtually all of the Debtor's revenues are generated through the collection of Assessments, as defined in the Declaration, paid by the owners of individual
In 2006 and 2007, sales of Units took place during a so-called condo-conversion, with Units selling for an average sale price of approximately $250,000.00. Today, there is a recorded first mortgage encumbering the overwhelming majority of Units in the Condominium, with a recorded second mortgage also encumbering many Units. The average first mortgage debt against Units as of June 21, 2011 was approximately $218,000.00 per Unit. As of that same date, the average value of a Unit was approximately $48,000.00. There is not sufficient equity in any Unit to exceed the amount of that Unit's first mortgage. In other words, every second mortgage and Assessment Lien is completely undersecured.
Prior to the Petition Date, mortgage lenders (the "Foreclosure Plaintiffs") initiated more than 180 mortgage foreclosure proceedings (the "Mortgage Foreclosure Proceedings") against Unit owners within the Condominium. Because a Unit cannot be conveyed separately from its interest in the Common Elements, the Common Elements constituted part of the collateral in every Mortgage Foreclosure Proceeding.
Pursuant to the Declaration
OneWest disputes that it has deliberately delayed taking title to at least two of the Units on which it holds first mortgages, Unit 307 and Unit 1704.
Pursuant to its Plan,
Notwithstanding the Foreclosure Plaintiff's failure to pay Assessments, and the Debtor's corresponding decline in revenue, the Debtor continued to incur the cost of maintaining the Common Elements since the Petition Date. In the seven-month period between the Petition Date and the
Contract Labor: $ 91,108.66 Insurance: $ 81,821.48 Repairs & Maintenance: $ 33,229.09 Telephone: $ 5,032.31 Utilities: $ 21,064.33 ____________________________________Total: $232,255.87
These expenses included electricity for the Common Elements, including the sprinkler system and security gates; telephone service, including service for the security system; water for landscaping; alarm service; swimming pool service; insurance for the Common Elements; electrician service; air conditioning service and replacement; security gate repair and maintenance; plumbing service and annual back-flow preventer inspections; employment of property management; supplies for the repair and maintenance of the Common Elements; and office supplies and equipment for property management staff. The Debtor continued to incur these costs through the Effective Date of the Plan.
OneWest acknowledges that all of these expenditures were necessary for the operation of the Condominium and the upkeep of the Common Elements. Jt. Stip. at 9. For example, without electricity there would be no lighting for the clubhouse, parking lot, or walkways, there would be no air-conditioning in the Common Elements, and the security gate and sprinkler system would not operate; without water landscaping would die; loss of alarm service would have increased the risk of criminal activity; loss of insurance would have created a risk of a total loss of buildings largely comprised of Common Elements; failure to pay for trash, pest, or swimming pool service would have resulted in unsafe, unsanitary conditions and possible enforcement proceedings; and failure to retain property management services would have resulted in a lack of physical property oversight and financial accounting.
Because the Common Elements are part of the collateral securing every first mortgage, and because there is no equity in any Unit exceeding the amount of its first mortgage, the First Mortgagees are the parties primarily benefitting from the Debtor's maintenance of the Common Elements. Jt. Stip. at 10. On account of this benefit, the Debtor seeks to surcharge Delinquent Units on which the First Mortgagees, including OneWest, hold mortgages. These Delinquent Units are late in the payment of their Assessments as of the Effective Date of the Plan. The Debtor does not seek to surcharge Units that are current on their Assessments, and seeks no relief against any Second Mortgagee.
OneWest relies on Florida law, which shields the holder of a first mortgage on a condominium from paying assessments until the mortgagee takes title to the condominium. Deutsche Bank Nat'l Trust Co. v. Coral Key Condo. Ass'n (at Carolina), Inc., 32 So.3d 195, 196 (Fla. 4th DCA 2010). As OneWest points out, federal bankruptcy courts are obliged to apply state law when determining rights and interests in property. Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). The Motion seeks to collect the equivalent of assessments that went unpaid during the Mortgage Foreclosure
The Debtor, on the other hand, argues that 11 U.S.C. § 506(c) applies without reference to state law. Pursuant to the Supremacy Clause of the United States Constitution, the Debtor asserts that § 506(c) controls in the case of a conflict with Florida law. The Debtor also asserts that the requirements for surcharge under § 506(c) are satisfied. This latter point is largely undisputed.
These arguments present an issue of first impression for the Court. For the reasons that follow, the Court finds that § 506(c) applies without reference to Florida law, and that the requirements of § 506(c) are satisfied. Accordingly, a surcharge is appropriate.
The Court has subject matter jurisdiction over this proceeding pursuant to 28 U.S.C. § 1334 and 28 U.S.C. § 157(b). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A).
OneWest relies on several sections in Chapter 718 of Florida Statutes, the Condominium Act.
Fla. Stat. § 718.116(1)(b) (2010). Section 718.116(1)(b) "makes it clear that the first mortgagee is required to pay assessments only after acquiring title," and cannot be compelled to pay assessments during a protracted foreclosure proceeding. Coral Key, 32 So.3d at 196. Citing section 718.116(1)(b), at least two Florida appellate courts denied essentially the same relief sought by the Debtor in this case: an order requiring a mortgagee to pay its fair
OneWest also relies on sections 718.115 and 718.303 of the Condominium Act. Section 718.115 provides in relevant part that "funds for payment of the common expenses of a condominium shall be collected by assessments against the units in that condominium[,]" and that "Common expenses of a multicondominium association shall be funded by assessments against all unit owners in the association[.]" Fla. Stat. § 718.115(2) and (4)(a) (2010) (emphasis added). Section 718.303 provides that unit owners and associations are governed by the provisions of "[the Condominium Act], the declaration, the documents creating the association, and the association bylaws[.]" Fla. Stat. § 718.303(1) (2010). Section 718.303(1) further provides that an action for failure to comply with the Condominium Act or the declaration may be brought by "the association or by a unit owner" against the association, a unit owner, certain directors, and tenants. OneWest argues that under sections 718.115 and 718.303, the Debtor may only bring an action for surcharge against a Unit owner, not a mortgagee.
The Debtor, on the other hand, asserts that § 506(c) of the Bankruptcy Code controls whether a debtor may surcharge a secured creditor, without reference to state law. Section 506(c) provides that:
11 U.S.C. § 506(c). Section 506(c) codifies a long line of cases "expressing and applying the equitable principle that a lienholder may be charged with the reasonable costs and expenses incurred by the estate that are necessary to preserve or dispose of the lienholder's collateral to the extent that the lienholder derives a benefit as a result." 4 Collier on Bankruptcy ¶ 506.05[1] (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2010). "The purpose of this provision is to prevent a windfall to a secured creditor at the expense of the estate." In re JKJ Chevrolet, Inc., 26 F.3d 481, 483 (4th Cir.1994); see also In re Visual Indus., Inc., 57 F.3d 321, 325 (3d Cir. 1995) (section 506(c) permits recovery against secured creditors to prevent unjust enrichment) (citing Collier on Bankruptcy ¶ 506.06 (Lawrence P. King, et al. eds., 15th ed. 1994)). The Debtor argues that the Supremacy Clause of the United States Constitution requires the Court to apply § 506(c) notwithstanding contrary state law.
The Court finds that § 506(c) applies without reference to state law. Nothing in the Bankruptcy Code indicates that § 506(c) incorporates state law. By contrast, throughout the Bankruptcy Code, Congress uses explicit language when it intends to incorporate state law concepts or preserve state law rights. See Patterson v. Shumate, 504 U.S. 753, 758, 112 S.Ct. 2242, 119 L.Ed.2d 519 (1992) (collecting references to "state law" in the Bankruptcy Code). For example, § 522(b)(3)(A) incorporates exemptions available under "State or local law"; § 553 provides that the Bankruptcy Code "does not affect any right of [setoff] that arose" pre-bankruptcy; and §§ 365, 502, and 544 incorporate state law concepts with the phrase "applicable law." The absence of similar language indicates that Congress intended federal law, not state law, to control
That the "Bankruptcy Code is often interpreted by reference to state law" does not change this analysis. Prudential of Fla. Leasing, 478 F.3d at 1298. The Bankruptcy Code generally defers to state law "whenever Congress has the authority to regulate an area under its bankruptcy powers but has chosen not to do so." In re Robertson, 203 F.3d 855, 859 (5th Cir. 2000) (citing In re Hudson Shipbuilders, Inc., 794 F.2d 1051 (5th Cir.1986)). However, when Congress does exercise its "broad power to establish a uniform rule respecting the existence and extent of a right" in bankruptcy, the rule is not subject to contrary state law. Hudson Ship-builders, 794 F.2d at 1058 (whether attorney's fees are "reasonable" under § 506(b) is a matter of federal, not state law); see also Welzel, 275 F.3d at 1315 (same).
The Supremacy Clause compels this result. The Supremacy Clause provides that the laws of the United States "shall be the Supreme Law of the Land; and the Judges in every State shall be bound thereby, anything in the Constitution or Laws of any State to the contrary notwithstanding." U.S. Const. art. VI, cl. 2. When the Bankruptcy Code and state law conflict, the Code "takes precedence over state laws under the Supremacy Clause[.]" Stanley ex rel. Estate of Hale v. Trinchard, 579 F.3d 515, 519 (5th Cir. 2009) (stating that the Supremacy Clause favors the Bankruptcy Code because the "subject of bankruptcies falls within the express constitutional powers of Congress."); see also E. Equip. & Servs. Corp. v. Factory Point Nat'l Bank, Bennington, 236 F.3d 117, 120 (2d Cir.2001) (Bankruptcy Code preempted state law tort claims for violation of the automatic stay); In re Osejo, 447 B.R. 352 (Bankr.S.D.Fla.2011) (Bankruptcy Code preempted Florida's constitutional homestead exemption); In re Old Carco LLC, 442 B.R. 196 (S.D.N.Y. 2010) (Bankruptcy Code preempted state franchise law that interfered with debtor's power to reject contracts).
In this case, applying section 718.116(1)(b) would shield OneWest from being surcharged even if the requirements of § 506(c) are satisfied. The Supremacy Clause dictates a contrary result. Therefore, § 506(c) preempts Florida Statutes section 718.116(1)(b). Similarly, assuming that sections 718.115 and 718.303 limit a mortgagee's liability for assessments, § 506(c) preempts any such limitation.
OneWest appears to acknowledge this flaw in its argument. In its written proposed order, OneWest points out that "Erie requires that, unless there is an applicable federal law (including a provision in the Constitution, statute, or treaty), state law applies." OneWest Proposed Order at 17 (emphasis added). The Court agrees. Section 506(c) is the applicable federal law governing a debtor-in-possession's ability to surcharge collateral. Therefore, state law does not apply.
Having determined that the Condominium Act does not apply to the Motion, the Court must determine whether granting the Motion is appropriate as a matter of federal law. To recover an expense under § 506(c), a debtor-in-possession must show that the secured creditor expressly or impliedly consented to the expense. In re Computer Systems, 446 B.R. 837, ___ 2011 (Bankr.N.D.Ohio.2011) (citing In re Ferncrest Court Partners, Ltd., 66 F.3d 778, 782 (6th Cir.1995)). Absent consent, the debtor-in-possession must show that: (1) the expenditure was necessary; (2) the amount expended was reasonable; and (3) the creditor benefited from the expenditure. Ferncrest, 66 F.3d at 782; see also In re Scopetta-Senra
In this case, the Debtor argues that the expenses were necessary to preserve, maintain, and repair the Common Elements, that the expenses were reasonable, and that the expenses benefitted OneWest.
There are two other issues the Court must address. First, the Court makes no findings as to whether it would be appropriate to award a surcharge for expenses the Debtor incurred after it foreclosed its Assessment Lien on Unit 1704, or after the Debtor conveyed title to OneWest. The Debtor stipulated at the June 21, 2011 hearing that this Motion only seeks reimbursement of expenses incurred from the Petition Date through February 15, 2011. Thus, the Debtor incurred all of the costs at issue before it foreclosed its Assessment Lien or conveyed title of Unit 1704 to OneWest. In other words, this Order only grants a surcharge for expenses incurred while OneWest was the first mortgagee on Unit 1704, under circumstances where the First Mortgagees undisputedly reaped the primary benefit of those expenses.
Second, the Court finds that whether OneWest deliberately delayed taking title to Units 307 and 1704 is irrelevant to the determination of the Motion. The purpose of § 506(c) is to prevent a secured creditor's unjust enrichment, not to punish dilatory intent. See JKJ Chevrolet, 26 F.3d at 483. The undisputed facts are that the expense of maintaining the Common Elements were the reasonable, necessary costs of preserving OneWest's collateral, and that OneWest benefited from the expenditure. It would be inequitable to permit OneWest to enjoy this benefit without paying its fair share of the cost. Applying § 506(c) avoids such a result. Therefore, the Court finds that a surcharge is appropriate.
For the reasons set forth above, the Court finds that OneWest should bear
It would be inappropriate, however, to determine the proper method of compelling compliance with this Order without first giving OneWest the opportunity to comply willingly. That the First and Second Mortgagees have generally remained aloof until this point is not evidence that the Mortgagees, or OneWest in particular, will fail to pay the surcharge awarded herein. Of course, the Court retains its inherent authority to enforce compliance with its own orders. See Jove Engineering, Inc. v. I.R.S., 92 F.3d 1539, 1553 (11th Cir.1996) ("courts have inherent contempt powers in all proceedings, including bankruptcy"); Shillitani v. United States, 384 U.S. 364, 370, 86 S.Ct. 1531, 16 L.Ed.2d 622 (1966) ("There can be no question that courts have inherent power to enforce compliance with their lawful orders through civil contempt."). The Court will consider the appropriate method of compelling such compliance if and when it becomes necessary. Therefore, the Court will deny the Motion without prejudice to the extent it seeks authority to enforce the surcharge beyond demand for payment.
The Court finds that § 506(c) applies without reference to state law in light of the section's language, and because § 506(c) codifies well-established federal common law. The Court further finds that the Bankruptcy Code preempts Florida law to the extent the latter purports to limit the Debtor's power under § 506(c). As such, because the Debtor's expenditures for the upkeep of the Common Elements were necessary, reasonable, and benefitted OneWest, the Court will grant the Debtor's request for a surcharge. However, the Court denies without prejudice the Motion to the extent it seeks authority to enforce the Debtor's surcharge through extraordinary means without further order of the Court.
The Court, having reviewed the submissions of the parties, the applicable law, and being otherwise fully advised in the premises, hereby
The Limited Common Elements include patios and balconies adjoining Units, and garages, storage spaces and/or parking spaces specifically assigned to a respective Unit.
